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Celldex Uses the Immunotherapy Boom to Build Its War Chest

Celldex didn't sell at the top, but the company executed a solid equity raise that should fund years of development.

One of the most important mantras for any pre-revenue biotech company is to raise money when you can, not just when you need it. Celldex Therapeutics(NASDAQ:CLDX) is following that advice, leveraging the ongoing biotech bull market and the boom in interest for cancer immunotherapies to raise another $171 million in cash.

Cash buys time and optionsCelldex has been steadily working through its cash reserves, going through $66 million in negative operating cash flow in the past 12 months. There's nothing particularly unusual about this -- biotechs burn cash, and Celldex is not only running a phase 3 study, but multiple phase 2 and phase 1 studies, as well as funding ongoing preclinical work.

With this new equity raise, Celldex should end the year with around $275 million in cash on the balance sheet, depending upon trial timing and how much the company incurs in upfront costs for the upcoming phase 3 study of CDX-011 in breast cancer.

That's a healthy cash position, and plenty to finish the phase 3 ACT IV study of rindopepimut in glioblastoma and the phase 2 ReACT study in recurrent glioblastoma (even with the relatively recent addition of a 75-patient expansion cohort), not to mention multiple additional phase 2 and phase 1 studies.

It also means that Celldex does not have to be in any hurry to find a marketing partner for any of its drugs. Although Celldex may very well decide to market rindopepimut on its own (provided the pivotal data warrants approval) and build its own sales force, but even if the company chooses to partner, and I assume they would at least for European and other ex-U.S. markets, the company will not be negotiating from a position of weakness.

An attractive pipeline in a hot spaceCelldex is a good example of the right sort of company and technology in the right place and time for the stock market. While it wasn't so long ago that antibody drug conjugation, or ADC, was the hot topic in oncology, boosting the likes of Seattle Genetics, attention has quickly shifted to immunotherapy, as companies like Bristol-Myers Squibb(NYSE:BMY) and Roche(NASDAQOTH:RHHBY) have wowed the medical and investment communities with compounds targeted at lung, colon, and breast cancers, as well as melanoma and hematological cancers.

Celldex's lead drug, rindopepimut, is actually a cancer vaccine. While the troubles of companies like Dendreon (and others like Vical that couldn't make it to approval) have soured some on the vaccine approach, rindopepimut has shown very encouraging efficacy in a very under-served market (glioblastoma patients have relatively poor prognoses, particularly those who do not respond to Roche's Avastin).

Rindopepimut is the furthest along in clinical development, but well may be one of the lesser commercial opportunities. CDX-011 has shown exciting efficacy in a hard-to-treat subset of triple-negative breast cancer, and CDX-1127 is a very interesting phase 1 mAb targeting CD27 that could prove to a powerful enhancer of other immunotherapy agents like checkpoint inhibitors. That would potentially make companies like Bristol-Myers, Roche, Merck, AstraZeneca, and GlaxoSmithKline (all of which are working on checkpoint agents) stand up and pay careful attention to the possibilities of creating an even more effective combo-therapy.

Were CDX-011 to show sufficient efficacy in the broader triple-neg patient population, it could be a $1 billion drug, as could CDX-1127 if its clinical data match the potential.

Hype and hope versus opportunityCelldex had been riding a hot streak for some time before spiking in October and pulling back by about a third, and the entire biotech sector is still running pretty hot. Even so, I think Celldex looks undervalued today -- the first time in a very long time I can say that.

Assuming a 45% chance of approval for rindopepimut and 50% chance for CDX-011 (both above the phase 3 oncology average of about 35%), and adding in Celldex's other pipeline candidates, I arrive at a fair value of around $28 today. Obviously a great deal can go wrong from here, but many things can also go right – including a major partnership with a relatively immunotherapy-poor Big Pharma like Sanofi, Bayer, Lilly, Merck, or Johnson & Johnson. Likewise, a company like Roche could easily fold in a company like Celldex and use it to enhance and complement its existing immunotherapy efforts.

The bottom lineKudos to Celldex management for raising money at an appealing valuation. The recent raise was at about a 12% discount to my estimate of fair value, which is great for a biotech at this stage of development. For investors looking to play immunotherapy, this looks like a good combination of solid technology, a reasonably broad pipeline, and a healthy balance sheet.